The Reserve Bank of India’s headquarters, which opened in 1981, is a white-clad high-rise building that towers over Mumbai’s Fort district, just a few blocks from the waterfront.
The RBI is also a key component of the country’s rapidly expanding digital payment network, as well as a model of collaboration between a central bank and private firms.
Over the last five years, India’s digital payment volume has increased at an annual rate of roughly 50%. That is one of the fastest growth rates in the world, but it has been even faster—about 160 percent annually—in India’s unique, real-time, mobile-enabled system, the Unified Payments Interface (UPI).
Transactions more than doubled to 5.86 billion in June from the previous year, with the number of participating banks increasing 44 percent to 330. During the same time period, values nearly doubled. Furthermore, the RBI introduced a UPI for feature phones (older devices with buttons rather than touchscreens) in March, which has the potential to connect 400 million users in remote rural areas.
The UPI system was launched in 2016. The demonetization initiative came as a surprise near the end of that year, when high-denomination banknotes were removed from circulation.
UPI was created in response to the country’s patchwork of payment rules and paperwork. The goal was to make transfers easier and safer by allowing individuals and businesses to use multiple bank accounts on the same mobile platform.
The origins of the UPI network can be traced back even further, to 2006, when the RBI and the Indian Banks’ Association formed the National Payments Corporation of India (NPCI).
The goal was to create an umbrella institution for the digitalization of retail payments, and it was formed as a nonprofit corporation to benefit the people of India. The Bank for International Settlements researchers wrote in a 2019 paper that this public good approach to providing digital financial infrastructure is relevant for all economies, regardless of their stage of development.
Multiple payment systems
Individual digital payment users are expected to triple to 750 million in five years, according to NPCI Chief Executive Officer Dilip Asbe, while merchant users could double to 100 million. According to him, the central bank fosters a diverse ecosystem of payment systems, including RuPay, a large market share debit and credit card issuer, the National Financial Switch cash machine network, and a payment system that uses the national identity program to bring banking to underserved areas.
“RBI determined that a country our size requires multiple payment systems so that citizens can choose from a variety of payment options,” he explained. “A system like UPI cannot enter any country unless its central bank and government are eager to do so.”
Open-source software
This transition was facilitated by the India Stack, a digital identity and payment system based on an open application programming interface, or API. It has been a driving force for greater financial inclusion by making services more accessible to consumers, including by incorporating the 1.3 billion-strong national identity program, Aadhaar.
According to Dinesh Tyagi, CEO of CSC e-Governance Services India, the government’s operator of centers for electronic public services in villages and other remote areas, open-stack technology is the foundation of UPI, which has transformed India’s digital payments.
“The government pushed open-source technology so that people could try to integrate quickly,” he explained. “In addition to traditional public sector banks, we promoted private fintech companies.”
